Is it Better to Save or Invest Your Money? -

Is it better to save or invest your money? They are actually two separate financial goals and really should be treated as such.

Saving is putting money aside for a specific goal such as an emergency fund or a future purchase.

Investing is using your money to buy an asset that you believe will increase in value and bring you a positive return on investment.

There is no hard rule regarding how much of your income to allocate toward saving or investing. It is a choice you must personally make based on your vision, values, and goals. Below are some pros and cons of each to consider.

Pros and cons of saving

Pros of a savings account

*Your money is liquid in a savings account, which means you can withdraw it at any time without fees.

*There is flexibility when saving money. You can adjust the amount and the frequency of your contributions at any time.

*A savings account has a fixed interest rate (which unfortunately is not much) which helps you plan how much money you will have available at a particular time.

*The FDIC insures savings accounts up to $250,000 per account so it is unlikely you will lose money with a savings account.

Above information is accurate at the time of this post. See link above for any updates.

Cons of a savings account

*The interest rates are low, meaning the return is also low. You won’t earn much for your savings. This is why it is not called an investment.

*Over time, the rate of inflation will affect the buying power of your money. For example, let’s say you have $10,000 in savings. In five years, that $10,000 will buy less than it would have five years before.

Pros and cons of investing

Pros of investment accounts

*There is a higher rate of return when investing. Compared with a savings account of 0.1%, an investment account averages a much higher rate.

*Investment accounts are liquid, which means you can convert the investment to cash at any time. This is not the case for retirements accounts.

*Over time you are likely to beat inflation and increase your buying power with an investment account.

Cons of investment accounts

*Returns are not guaranteed and there is a risk that you could lose some money as investment accounts are not backed by FDIC.

*There are fees associated with investing. If a broker is helping you out, there will be brokerage fees as well.

*The market fluctuates. There is a risk of a down cycle in the market that could upset your plan.

Saving or investing – which is better?

Honestly, neither is better or worse. It really depends on your goals. You will probably find that doing both suits you just fine. How much saving or investing is up to you.

Here are a few things to consider when deciding:

What is the money for and when do you need it?

Is this for emergency funds? I highly suggest leaving emergency funds in a savings account. Emergency funds hopefully are never needed but if they are, they better be available.

If you need the money in less than five years, you might consider a savings account vs an investment account. With a savings account, you know exactly how much money you have without the risk of a market downturn.

If you do not need the money for at least five years, consider investing some or all of it. The market will fluctuate but if you have the flexibility of time, you can always wait it out if necessary.

If you are not exactly sure when you will need the money, then consider leaving it in savings until you have a better idea. For example, let’s say that you are planning to buy a house and you have your downpayment sitting in the bank but you are not sure when you will move. You may not want to risk investing that downpayment money in case of a market downturn.

Are you market savvy?

If you understand the market you may feel more comfortable investing your money vs saving it. In fact, it may be fun for you.

However, if you are not market savvy then you will probably want to reach out to a professional for help. There are costs and risks involved, so do your homework first.

Risk tolerance plays a role in saving or investing decisions

Are you a risk taker? If you are willing to take risks, you have unlimited potential. However, there is also the possibility you can lose it all. This is totally your call. If you share money with someone you better be on the same page though. If one is not a risk taker and the other is, I suggest finding a strategy that works for both.

I am definitely not a risk-taker. I invest a little but I stick mainly to savings accounts. They are secure and consistent and I have no surprises. The downfall to that is that I have no good surprises either. But, I am okay with that. Get to know your money personality and the level of risk that makes you comfortable before diving in.

Saving or investing summary

The choice is not whether to put your money into a savings account or an investment account. You can do both. Consider the best strategy for each financial goal you have. Saving might be better for some goals while investing is better for others.

Determine what your money will be for when you will need it, and how much risk you are willing to take and then decide.

Is it Better to Save or Invest Your Money?